Anonymised, illustrative composite. An allowance percentage asks how likely a debt is to be collected. It cannot answer a different question: whether the debt can still be sued on at all. That one has a date, and the date is in the statute.
At a glance
The target cleaned food-processing plants and distribution centres on annual contracts, invoicing monthly in arrears. Accounts receivable was its largest asset and the working capital peg was the most negotiated number in the deal. The vendor's ageing report showed gross receivables of $1,940,000 against an allowance for doubtful accounts of $85,000, and the peg was set on the net figure of $1,855,000.
The buyer's accountant ran the standard tests: concentration by debtor, days sales outstanding by year, subsequent cash receipts on the largest balances. All three came back acceptable. The debtor mix was broad, days sales outstanding had been stable at 52 to 58 days for three years, and the top twenty accounts had paid down normally in the two months after the report date. For the concentration question specifically, see the live case file a receivable ledger propped up by one debtor, which asks who owes the money. This file asks something else.
The oldest ageing bucket was a single column headed “over 365 days” holding $310,000 across thirty-one accounts. The vendor's position was that these were collectable but slow — municipal customers, a food processor in a receivership that was expected to pay out, a handful of disputed change orders. The buyer's accountant proposed an additional allowance of forty per cent on the bucket and the vendor countered at fifteen. That negotiation, which is where most deals resolve this, was answering the wrong question.
An allowance is an estimate of how much of a debt will be collected. It says nothing about whether the company retains the right to compel payment. Once a limitation period has run, no percentage is correct except zero, because the buyer is not acquiring a doubtful asset — it is acquiring an invoice with no legal remedy behind it. The ageing report, by lumping everything past a year into one column, made the distinction invisible.
The full ageing at the diligence date: 0–30 days $980,000; 31–90 days $412,000; 91–365 days $238,000; over 365 days $310,000. Total $1,940,000.
The buyer asked for two dates on every account in the oldest bucket: the date each invoice became payable under its own terms, and the date of the last payment or last signed acknowledgment from the debtor. That produced a clean split. $228,000 across nineteen accounts had become payable between twenty-five and forty-one months earlier, with no payment and no written acknowledgment since. $82,000 across twelve accounts carried a part payment eleven to fourteen months earlier, which put them inside the period.
The $85,000 existing allowance had been booked against three disputed balances sitting in the 91–365 bucket, so it did not overlap the $228,000. The peg accordingly moved from $1,855,000 to $1,627,000. Because the working capital true-up was dollar for dollar, that was $228,000 off the closing payment.
Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, s.4 is short: “a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered”. Section 5 then defines discovery, and s.5(2) supplies the presumption that does the work on a trade receivable: a person with a claim “shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved”. For an unpaid invoice the act or omission is the failure to pay when payment fell due, so the clock starts on the due date unless someone can prove otherwise.
One exception is worth naming because it does not apply here and is regularly assumed to. Section 5(3) provides that for a demand obligation the loss occurs “the first day on which there is a failure to perform the obligation, once a demand for the performance is made”. That covers instruments payable on demand — a shareholder loan, a demand promissory note. A trade invoice with stated terms is not a demand obligation, and treating one as if it were is the commonest way an aged ledger is defended.
The revival rule is s.13, and its limits matter more than its effect. Section 13(1) provides that where a person acknowledges liability for a liquidated sum, “the act or omission on which the claim is based shall be deemed to have taken place on the day on which the acknowledgment was made” — the clock restarts. Section 13(11) extends this to part payment: “part payment of the sum by the person against whom the claim is made or by the person’s agent has the same effect as the acknowledgment referred to in subsection (10)”.
But s.13(9) caps it, and this is the point on which the file turned: “This section does not apply unless the acknowledgment is made to the person with the claim, the person’s agent or an official receiver or trustee acting under the Bankruptcy and Insolvency Act (Canada) before the expiry of the limitation period applicable to the claim”. An acknowledgment or a part payment inside the two years restarts the clock. One made after the period has run does not revive anything. A fifty-dollar payment on a four-year-old balance is not a rescue; it is a fifty-dollar payment.
The nineteen barred accounts were removed from the peg entirely and assigned to the vendor for whatever it could recover commercially, which is a real possibility — an expired limitation period bars the proceeding, not the debt, so a debtor that chooses to pay may still do so. The twelve live accounts stayed in at face value with an ordinary allowance. The accounts receivable representation was rewritten from the usual formulation about amounts arising in the ordinary course to one warranting that no receivable included in the closing statement was, at closing, barred by a limitation period.
$228,000 of purchase price paid for invoices that could not be sued on, and then a bad recovery path. The buyer's only route back would have been a claim under the accounts receivable representation, which carried a $56,000 basket — one per cent of the price — and an eighteen-month survival period. Worse, the ageing report had been listed on the disclosure schedule, so the vendor's answer would have been that it disclosed the bucket and the buyer priced it. It would have been right.
An ageing report whose oldest column is open-ended. “Over 365 days” and “over 120 days” are the two that hide this, because the whole question lives inside the column. Ask for the bucket exploded by invoice with three dates on each line, and the answer takes an afternoon.
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